The large apparent element of surprise in last night’s successful attack by oil bears looks largely due to the ample distracting news flow elsewhere. Inflection points on Brexit and Italy remain a key focus, whilst hopes of beginning of trade war de-escalation also somewhat lulled vigilance. Warning signs are glaring in hindsight though. In fact, Brent crude futures had been in the red for 11 straight sessions into Tuesday, taking the loss since early October to the brink of 30%. That’s well within the conventional definition of a bear market. Tuesday evening’s wake-up call could linger due to the market’s return to that frame of reference alone.

Traders heed temptation

The volatile plunge should harden views at de facto OPEC leader, Saudi Arabia. The kingdom had already floated the idea of new output cuts to offset indications that supply/demand was tipping unfavourably. Official Saudi utterances could now be less tentative, though still multi-faceted after Trump’s overnight comments. The next OPEC meeting is scheduled on 6th December. The path to broader supply reductions is less clear. Therefore, an apparent revival of prices in Europe faces a formidable $4.52 range before the temptation to sell rallies eases. Traders can be expected to heed that temptation for now. At $65.81 just now, December Brent crude was rapidly leaking morning gains to as high as $66.81.

The oil upset has the edge in European market sentiment. True, nerves are also stretching as high-tension returns to Italian yields. Also, after Europe’s growth engine, Germany, stalled in GDP data; raising fresh hurdles for sticking with the region’s recovery scenario. Shares in car and parts markers continue to track prospects that a “cold (trade) war”, between the U.S. and China can begin to be averted at G20 talks later in the month. China has made it known it is wheeling out the most experienced diplomatic big guns to prep discussions. The barriers to rapprochement remain high. It’s telling that Chinese stock markets were bereft of much lift in their Wednesday session.

Brexit hangs on Raab today

Brexit murk may or may not clear over the next 24 hours. Still, the market is sensibly restricting focus to one staging post at a time and there are now enough promising signals that the tortuously worded deal can make it past cabinet approval. Senior ministers mentioned in the Sun political editor's late-night tweet would include the one whose backing - and willingness to stay on board - are essential to prevent the deal from failing in Downing Street. Brexit Secretary Dominic Raab has been the most effective cheerleader of an arrangement that could pass Brexiteer muster. Now, with a deeply conflicted draft at his fingertips, it appears his political career faces a blow-up, whether he chooses to endorse it or not. But his chances are still better in post. Traders will therefore home in on whether Raab can find enough vestiges in the outline on which to hang his credibility. Exits by other pro-Brexit cabinet members, like Commons leader Andrea Leadsom or Trade Secretary Liam Fox, would also drag to markets. But since Theresa May’s government would could survive such possibilities, Raab’s reaction looks to be the most pivotal.

Sterling totters

Assuming overall approval, our perception is that the market remains inclined to wring as much sterling upside as possible from the pound's rapid and precarious stride from $1.2838 lows on Tuesday morning to low $1.29s, where it stood just now. Traders swiftly filed soft consumer inflation readings under ‘Less Important’. That suggests Tuesday’s launch point, $1.2837 can still be viewed as intermediate support. Heightened implied volatility, as ever, is the wild card. ‘Vanilla’ one-month options and those lasting a week keep setting new highs for the year. They’re a reminder that all bets could still be off at the drop of a hat. Indeed, cable has sliced through c. $1.2948 this morning, a low tested earlier in the month where many expected longer-lasting support.

The biggest risk of the deal's demise does appear to lie ahead in a parliamentary vote, likely early in December. Before then, and again, assuming cabinet approval, sterling’s range could certainly extend to the upside during any emergency EU summit, where only perfunctory amendments if any, are the likeliest outcome. Sterling's recoupment could then peter out quite naturally on weakening momentum, partly as then would be the shrewdest juncture to book profits. U.S. inflation readings later will be the clearest point over the next 24 hours at which dollar consolidation could end, depending on the details as much as the headline. Any subsequent rise in pressure on sterling could spell the definitive end of the current up leg regardless of Brexit.

Economic Calendar

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